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July 1, 2020
All Articles by: DEV KUMAR KOTHARI       View Profile
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Requirement of CSR committee:

Requirement of constitution of Corporate Social Responsibility (CSR) Committee is primary requirement under the Companies Act, 2013 (the Act in short). If a company is required to form such a committee then other statutory requirements will apply. The Section 135 (1) of the Act, so far relevant for the subject of this write-up reads as follows:

  135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board …

From above we find the three alternative conditions as follows:

net worth of rupees five hundred crore or more or

turnover of rupees one thousand crore or more or

a net profit of rupees five crore or more

during the immediately preceding financial year.

The figures of 500CR, 1000CR and 5CR appears to have no consistency and logic keeping in mind the ultimate purpose of CSR – spending out of profits.

 A manufacturing company may require large investments so net worth need to be high though turnover and profits may be low.

 A trading company with short duration between buying and selling that is high turnover ratios, can achieve large turnover with small capital. In case of trading companies usually profit margins are very low.

Ground reality is that profit is not necessary result of net worth and turnover. Even a large net worth company may lose net worth if industry run into losses for few years. For example, we can take case of Shri Anil Ambani and his companies.

Even at higher turnover there can be low profits or there can be loss.

Whereas in some cases, even with low net worth and low turnover profits can be high.   

Therefore, in view of author, the three limits fixed are without proper consideration of ground realities about business and without keeping in mind the purpose of introduction of CSR concept. Is it not a case of legislation without application of mind.

The purpose of CSR is to ensure some activity for society:

The purpose of imposing CSR obligations by law, on companies is to ensure that certain amount of profit earned by companies is spent towards specified social activities,  as per statutory provisions and guidelines etc. Therefore, real impact will be only when there is minimum specified amount of profits earned by any company. The amount of net worth or turnover has no impact on amount to be spent towards CSR.

The amount to be spent is based on profits of company. This we find from the following provision contained in sub-section (5), relevant portion of which is reproduced below:

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, 5[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,] in pursuance of its Corporate Social Responsibility Policy:

Observations of author:

In view of above provisions we find that the real CSR obligation triggers only when there is profit of ₹ 5CR or more and not before that. Therefore, requirements of CSR committee based on net worth and turnover seems to be superfluous. For example, suppose a company has raised capital and is in process of establishing factory. There may be net worth of ₹ 500CR but there is no turnover and there is no profits, therefore there is no obligation of CSR spending.  Suppose this company, after starting commercial production suffer losses in initial 2-3 years and there is no profit so there is no obligation for CSR spending.

Similarly companies having high turnover but at very low margin of profits or having losses, there may not be obligation to spend towards CSR.

For such companies the constitution and maintaining CSR committee is of no meaning.

Therefore, requirement of CSR Committee and spending  should only be for companies having high profits.

The amount of limit of profit of ₹ 5CR is also low, it must be raised to at least 25 CR.  


By: DEV KUMAR KOTHARI - July 1, 2020



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